Digital ESG reporting means sustainability disclosures in a machine-readable format. Before we go into the details of digital disclosures and how organizations and their various stakeholders benefit from machine-readable information, let us understand what ESG reporting is all about.
ESG stands for Environmental, Social, and Governance. ESG deals with the non-financial aspects of business activity. ESG reporting is essentially about the impact business activity has on the environment and society. It is also about the impact that the environment and society might have on an organization. The questions that ESG reporting seeks to answer are: How sustainable are a company’s activities? Do those activities harm the environment and society in any way? What risks does a company face from the external environment or climate change? How is a company treating its employees? How does a company stand on issues of diversity – of gender, race, and nationality?
To make ESG disclosures, companies around the world have multiple sustainability accounting standards to choose from. Some of the popular sustainability standards are those released by the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-Related Financial Disclosures (TCFD). For more information about sustainability standards, read one of our previous blogs here.
To convert ESG disclosures into a digital format, companies need to adopt digital reporting frameworks known as taxonomies. Over the next few paragraphs, we will elaborate on digital ESG reporting standards and how they benefit companies and stakeholders alike.
How ESG Reporting Can Benefit From A Digital Process
As mentioned above, companies around the world have multiple sustainability standards to choose from for making their ESG disclosures. It is advisable for companies to choose one or a maximum of two standards for their disclosures. Using any more than two standards might make it difficult for the stakeholders of those reports to analyze them effectively. It is also advisable that companies use digital standards to prepare machine-readable sustainability reports which are easier to analyze. The reporting format that facilitates machine-readability is the eXtensible Business Reporting Language (XBRL). Machine readability is desirable in the final sustainability report made available to stakeholders and in the preparation of that report. In other words, the XBRL format not only benefits the user of a machine-readable report but the preparer, too.
XBRL reporting involves placing machine-readable tags or labels against individual disclosures. Those tags or labels are available in a ‘taxonomy’, which is best described as a dictionary of machine-readable tags. Several sustainability frameworks such as the SASB (Sustainability Accounting Standards Board) Standards, GRI (Global Reporting Initiative) Standards, and the TCFD (Task Force on Climate-related Financial Disclosures) Standards have machine-readable versions or taxonomies.
Since XBRL is a machine-readable language, it helps computers understand the disclosures companies make. This ‘computer readability’, coupled with the features and functionalities that XBRL software provides, makes ESG reporting a smooth and hassle-free process.
XBRL allows companies to interact with their information or disclosures in ways not possible when non-machine-readable formats are used. With most manual, repetitive tasks handled seamlessly by XBRL software, ESG reporting teams can concentrate on what they are meant to do – facilitating high-quality ESG disclosure.
The Benefits That Have Accrued To Financial Reporting
Over 100 regulators in more than 60 countries around the world require entities under their purview to report financial information in the XBRL format. Regulators prefer the format because it allows them to collect high volumes of high-quality data in a machine-readable format. The following are the benefits of XBRL data to regulators and reporting companies. The same benefits can also accrue through digital ESG reporting.
- Better Analysis Due To Machine-Readability: Reports in machine-readable format can be rendered through XBRL software to facilitate analysis. The data can be pulled onto spreadsheets at a click. Users can slice and dice XBRL data in a number of different ways.
- Comparable Disclosures Across Organizations: When multiple companies file XBRL reports, it allows regulators and users to compare data across organizations and industry sectors. The machine-readable tags help users to access the same specific set of data for multiple organizations.
- Better And Quicker Decision-making process: XBRL helps the regulator, investors, and analysts to access corporate reports easily. It quickens the analysis and decision-making process by allowing easy analysis and comparison.
- Better Safeguards Against Greenwashing: XBRL helps companies to make their disclosures in a highly structured manner where most data points have a machine-readable tag attached. Key stakeholders – who include regulators, investors, analysts, consumers, and activists – have access to the same information in a machine-readable format. This makes it harder for companies to market half-hearted sustainability efforts as those taken in the best interest of the environment, society, and employees.
Satisfied Stakeholders – Investors, Employees, Consumers
As mentioned above, the key stakeholders of ESG reporting include regulators, investors, analysts, consumers, and activists. Digital ESG reporting can lead to greater stakeholder satisfaction because it meets their information needs more optimally. In the previous point, we talked about digital reports lending themselves to better analysis and comparability across sectors. This leads to safeguards against greenwashing and facilitates quicker decision-making. Digital taxonomies – which we have mentioned above – call for specific and concrete data points in ESG reports. They leave no room for a narrative that cannot be supported by numbers or facts. Therefore, companies can communicate the value of their non-financial activities more effectively. Stakeholders would only need to use XBRL rendering software to view digital ESG reports and pull the data onto spreadsheets. There would be no need to manually transfer ESG data to spreadsheets.
Why Did Gap Inc, Voluntarily File ESG Reports In XBRL?
Here’s an example of a company voluntarily adopting digital ESG reporting.
Gap Inc., the American multinational clothing and accessories retailer, has been a long-time adopter of SASB Standards. The company has chosen to prepare its 2021 sustainability report in digital format using the SASB XBRL taxonomy. Marvin Smith, the Director of ESG Reporting & Disclosure at Gap Inc., said the company adopted the XBRL format so that the sustainability report would be more accessible to various stakeholders.
“Having that machine-readable (XBRL) element is another way to ensure that our disclosures are accessible to key stakeholders to process and evaluate our ESG performance. We believe it is important to make information available in a useful, comparable, reliable, and importantly, accessible manner, and in a format where investors and stakeholders increasingly process information – in the digital format,” Smith said.
The sustainability director also said that using the SASB XBRL taxonomy improved his company’s disclosure process. “There is sometimes a gap between the way that we disclose the information based on what’s outlined in the (sustainability accounting) standard…and the way that the XBRL taxonomy functions. The XBRL taxonomy has a level of rigidity – and I’m saying that not in a bad way. It just organizes and structures things in a way across multiple dimensions that is very well thought out and very simple for people to process.”
Gap Inc. prepared its 2021 digital ESG report using IRIS CARBON®. Check out the company’s PDF report here.